Choosing to grow your business through an M&A transaction or through a strategic partnership or joint venture can be a difficult decision to make. M&A transactions and partnerships can both drive growth and bring access to new markets or product and service offerings, but they also come with unique challenges. While an acquisition allows the acquirer to gain control over the target, M&A transactions can be costly and the acquirer not only obtains the target’s business but also its liabilities, which can be significant.
Strategic partnerships, on the other hand, do not provide the same degree of control but may be a more viable option if acquiring the target may be too costly. Businesses need to carefully consider whether an acquisition or an alliance is the best achieve their growth. PwC recently released a list of key considerations that businesses need to consider when deciding whether an partnership or an acquisition is the best course of action.
Are you looking to correct a gap in your company’s capabilities or to enhance existing strengths?
If you are looking to correct a deficiency in your company’s ability to perform certain functions, an acquisition may bring in more value, as you will be able to absorb and integrate the target’s strengths into those particular capabilities. However, if the target company has ancillary products or services that the you as an acquirer do not want to integrate into your existing business, a partnership may be the appropriate solution. Partnerships allow for negotiation on the specific components of the target’s business to be integrated. If you are looking to enhance existing strengths, an acquisition is practical only if most of the target’s products or services would align with and enhance your business. Otherwise, there may be too many components of the target’s business that will need to be shut down or sold off, which may lead to a prolonged post-acquisition process.
How much control are you looking to have?
An acquisition is a better option when you are looking to acquire control over how the target’s business is run. This is particularly important for deals involving complex or proprietary products or services, as well as those involving an acquisition of assets that require more time to become profitable. In contrast, a joint venture or a partnership may be preferable when you are looking to gain access to the target’s product or service but do not wish to have control over the operational aspects of the target’s business. It is also a great option for when the target is a large company and a merger would be prohibitive on cost.
Will an acquisition give you the return on your investment that is large enough to offset its costs?
Since the costs of entering into a M&A transaction tend to be much greater than pursuing a joint venture or an alliance, it is important to consider (i) if the return on the investment will make the deal worth the investment and (ii) the risks that come with an acquisition. In a M&A transaction, value is often derived from combining business operations, including delivery systems, logistics and support systems, which should create efficiencies and reduce the overhead that existed when the acquirer and target were operating as two separate businesses. A partnership may be a preferred option where integrating the two businesses would not produce enough efficiency benefits to outweigh the costs of the transaction.
Have you considered the market trends that may predict the success of a M&A transaction or a partnership?
Before embarking on a M&A transaction or a strategic alliance, it is also important to consider market trends and past deals in the industry to look for potential problems or barriers to success. Some industries may see pressure from shareholders or declining prices for their products that may require companies to abandon diversification and focus on a few key product or service offerings, making a M&A transaction less desirable. Past deals can give you a glimpse into how competitors and consumers have reacted to an acquisition versus a partnership in the industry and give insight into any regulatory challenges a deal may face.
Will you have to divest large portions of the target’s business?
A M&A transaction may bring a part of the target’s business that offers little value to the acquirer or may be more profitable if it is sold off post-acquisition rather than integrated into the acquirer’s business. It is important to consider whether a complete sale or spin-off is the right way to divest portions of a target’s business that are underperforming or undesirable for the acquirer. A divestiture into a joint-venture may be preferable over a full sale of the asset, as it keep that portion of the business within the acquirer’s portfolio but brings in another company with expertise in the field as a partner to improve the underperforming asset.
The author would like to thank Olga Lenova, Articling Student, for her assistance in preparing this legal update.
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